Comments on Recent News from Xinyuan Real Estate

A few observations about the bond offering and disclosures from the half-year financial statements:

Bond Refinancing.  Xinyuan sold US$300mm of new three year notes at an 8.125% yield (Press release).

Xinyuan is likely to exercise its option to redeem its currently outstanding $200mm 13.25% 2018 notes at a premium price of 106.625%.  The prepayment penalty will be a charge against against 2016 earnings, but the cost will be more than offset by lower future interest expense.  Xinyuan may exercise its option next year to redeem its currently outstanding $200mm 13% 2019 notes at a premium price of 106.5%.

The 8.125% rate is still relatively high among “B” rated Chinese property companies for the reasons cited by Fitch Ratings.  Xinyuan reported the offering was heavily oversubscribed with total bids over US$1.7Bn.

Xinyuan’s limited land reserves are often cited as a credit risk, but there’s an overlooked cyclical factor.  It would be great to have more land now that values are booming, but many developers (including Xinyuan) over-committed to land purchases during the 2H13-1H14 boom and were left paying high interest rates rates on debt used to finance zero yielding land assets during the 2H14-2015 downturn.

China Home Prices Chart August 2016

Xinyuan could create more value for shareholders and more security for bondholders through prudent timing of land acquisitions rather than by maximizing its land reserves.

The indenture for the new notes has limits on dividend payments and share repurchase that are less restrictive than those in the currently outstanding notes.  The Fixed Charge Coverage Ratio is relaxed to 2.50 to 1.00 vs 2.75 to 1.00.  The annual allowance for dividends and share repurchase when the Fixed Charge Coverage Ratio has not been met is increased from $35mm from $50mm.  If the 2019 notes are redeemed next year then the $50mm allowance would enable Xinyuan to continue rewarding shareholders as it has done in 2016 (see: Xinyuan Real Estate’s Aggressive Share Repurchases Send a Strong Signal About Shareholder Value).

Updated Gross Margin Projections.  The 6/30 financial statements incorporate updated financial projections for each project currently under development.  Most improvements reflect this year’s strong property market.

XIN Margins by Project 063016

Xi’an Metropolitan increased Xinyuan’s 50% equity interest at 12/31 to a  66% controlling interest at 6/30 at a bargain price of just US$516 thousand.

Kunshan Royal Palace saw a sharp reduction in expected return only because the 12/31 projection did not include the amount paid by Xinyuan to acquire the company that started the project.

Changdu Thriving Family expectations became slightly less poor as a strong market has boosted selling prices and volumes.

The New York Oosten project (not included in the table because it is not reported under percentage of completion accounting) delivered 3 units to customers in 2Q16 on which the company recorded US$10.6mm of revenue.  The development is essentially complete and most units should be delivered by year-end.

 

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